Amara Raja Batteries’ fortunes are linked to prices of lead

Najaf Ishrati
ET Intelligence Group

Dec 31, 2005,
ET Big Bucks, Pune.

LEAD producers around the world are benefiting enormously from the prevailing high prices, but the same is not the case for consumers of lead. Amara Raja Batteries (ARBL), better known for its “Amaron” brand of car batteries, is at the receiving end. The company makes lead acid batteries for automotive as well as industrial use. Its sales have shown a secular increase over the last five years, growing in FY05 to Rs 236.8 crore from Rs 175.9 crore in the previous year. For the half-year ended September ’05, its net sales were Rs 154.3
crore already, up 64% y-o-y. The company’s profit for FY05 is just Rs 8.6 crore. But this is 525% higher than last year’s and the same is a telling comment on the state of its margins.
The company maintains an OE (original equipment) agreement with Maruti Udyog, Hyundai Motor and other major car makers. The government’s push and shove in the telecom sector continues to underwrite an increasing industrial demand for batteries. Directors maintain that demand from railways is also expected to remain stable. ARBL’s principal nemesis over the last few years has been prices of its primary raw material lead, which have increased by over 200% in the last five years. The percentage of raw material used in net sales was 47% in ’03-04, which rose to 58% in ’04-05. In H1FY06, this ratio has risen to a high of 65%. The fact that lead accounted for 58% of total raw materials in FY04 and a whopping 71% in FY05, gives the investor an inkling of the situation. Simply put, ARBL’s costs were rising at a rate higher than its income.
The company’s return on equity for FY05 was less than 5%, while return on assets was a paltry 2.52%. Its net profit margin, which is the ratio of PAT to sales, was 3.24% in the same year. However, low profitability need not be associated with a lack of financial soundness, and in this regard, Amara Raja shows impeccable records. Its current ratio for the same year was 2.26, while its overall debt asset ratio was a very sound 0.36. The debt to equity ratio stood at 0.55 for the last financial year.
Had ARBL been able to pass on the increase in input prices like international oil companies, the story would have been entirely different. The record books of the company reflect measures taken to rectify its profitability, mainly by an increase in capacity. It showed an expansion in capacity from 12.75 lakh units in March ‘04 to 17.75 lakh by March ’05. It also had plans for a further 50% increase to 26.75 lakh units by December ’05. The company is fully geared to increase sales numbers, as it is not in a position to increase prices. This is apparent when you look at the turnover figures. The increase in net sales mentioned above is almost entirely on account of
an increase in units sold (29%), and not a
hike in price (4%). As costs are increasing, it appears as if the company must continuously increase the number of units sold to keep up the pace. The good news for the company is that with batteries having a three-year life, the auto sector which was already in its boom phase by ’02-03 is underwriting a growing demand.
This said, an increase in demand is good so long as margins do not keep eroding. Ideally, companies would like profit growth to be directly proportional to their turnover growth, after a threshold point. But when in FY01, the average lead price was $469 (per tonne), the PAT was Rs 20 crore. If we jump to FY04 when lead price averaged $628, ARBL’s corresponding PAT tumbled to Rs 1.3 crore. In FY05, when the average lead price was $949, PAT was Rs 8.6 crore. This shows that over the last year, the company has heavily absorbed and discounted the lead price factor with growth in sales. A promising sign is that this far into the current fiscal (April-September ‘05) lead prices have marginally decreased to an average of $947. Corresponding half-year PAT was up 15% YoY, at Rs 6.8 crore. But this again is significantly due to an increase in “other income”, to the tune of Rs 6.3 crore. Thus the future outlook for ARBL will be charted by how it wrests market share from current leader Exide, but any significant change in lead prices will be the key factor.

On the slow track

Mutual funds have miles to go to make the most of the stock market boom. Their low share of savings in financial assets stands testimony to this, says Najaf Ishrati

May 10, 2006,
ET Money and Banking, Mumbai

"IF YOU torture data sufficiently, it will confess to almost anything.” So goes the US chemist Fred Menger. Data published by the mutual fund industry and the Reserve Bank of India reveal that assets under management of mutual funds grew 60% last year, while bank deposits rose only 22.8%.
The growth in the asset base of mutual funds and the shortage of deposits faced by banks received so much attention that anyone would be forgiven for believing that Indians are shovelling all their savings into mutual fund schemes and that the share of bank deposits is on the decline.
Assets under management of MFs have been picking up at a phenomenal pace. At the end of April this year, MFs were managing assets worth Rs 2,53,560 crore, a growth of 60%. A year ago the figure was Rs 1,57,998 crore. Bear in mind that we are talking about the entire assets under management, including the element of corporate surplus in liquid instruments and capital appreciation.
Meanwhile, banks, which have been struggling to match the deposit growth with the increase in advances, have grown their deposits by Rs 3,87,471 crore, which is 33% more than the entire assets base of the MF industry. With outstanding deposits standing at Rs 21,13,100 crore, mutual fund assets account for less than 12% of deposits in the banking system.
Instead of looking up with the three-fold rise in the sensex since 1994, things have actually worsened for the MF industry. As against a 7% share of the savings in financial assets in ’93-94, MFs today account for less than a 4% share of savings in financial assets.
A decade ago, during the heydays of the Unit Trust of India when funds managed by MFs accounted for nearly a fifth of bank deposits, fund managers spoke about how MFs would rival bank deposits in future.
What the fund managers had not accounted for was the collapse of the flagship UTI. Having failed to build a suitable distribution system, private mutual funds were not able to occupy the space created by UTI.
Nilesh Shah, chief investment officer, Prudential ICICI MF, takes a clear angle. “Globally, investments into MFs have shown a geometric progression. Here we haven’t yet reached the critical stage for the takeoff.” Typically, the middle-class makes investments based on trust rather than return, he explains. “They would prefer to go to the government, banks, or anywhere where they feel that their hard earned money is safe. Also, their experience with equity has not been positive because of the crashes and scams. It is up to us mutual funds to keep performing, and gain that trust.”
SV Prasad, CEO, Birla Sun Life MF, makes another point. “Typically, Indians have always looked at equity as ‘quick money’, while this is not true. Someone investing in an 11-year-old fund would have made an annualised return of 31.5% per annum. The awareness that equities give better returns in the long-term than real estate or commodity is now spreading, and the scope for the future is tremendous.”
An analysis of mutual fund investments shows that they are not the major equity players they are made out to be. If one looks at the net inflows into equity schemes of MFs, the picture becomes abysmally bleak. In calendar year ’05, as little as Rs 23,812 crore found its way into equity schemes (this figure is the final flow, net of purchase, repurchase and redemptions of units in growth, ELSS, and balanced schemes. To be on the safer side, three-fourth of the net flow into balanced funds was assumed to be headed for equity). In CY04, this flow was Rs 9,524 crore. These inflows are bound to be minuscule compared with the money flow into bank deposits.
The question is, why aren’t we putting any sort of sizeable money into MFs? It is one thing to say that the industry is growing at a
large pace. It is another matter, though, that the base is so small that any increase hardly amounts to anything. To look at the issue from another angle, we go back to some more data. India’s gross savings are estimated to be around 30% of India’s GDP. However, the latest annual report of RBI puts the share of gross financial savings in ‘04-05 at a lesser 13.7% of the GDP. This comprises elements of currency (1.3%), deposits (5.4%), shares, debentures, equity and MFs (0.2%), claims on government (3.3%), insurance funds (1.8%), and provident and pension funds (1.8%).
It is clear what kind of battle MFs are fighting. First, over half of the entire savings of the country goes into non-financial assets like real estate and commodity. Secondly, even of the financial pie, currency, debt and small savings eat up into the equity market share. The funds are literally left with the financial crumbs.
That India is still pretty much under-invested is a point driven home by Naval Bir Kumar, managing director, Standard Chartered MF. He says that this is “because Indians are so used to high interest rates and huge tax-free returns from small savings schemes that some amount of laziness has crept into the psyche. However, as interest rates are lowering, and the small schemes are unable to deliver beyond a point, there is definitely growth in store for MFs.”
Then there are some systemic problems for the industry. To tap new markets, funds have to venture out to newer places, requiring investment from asset management companies (AMCs). The return on this has to be obviously higher than the cost.
Rajan Krishnan, business head, asset management, Principal PNB MF, says: “MFs face the classic chicken and egg symptom of whether to first let the market grow and then enter (losing the first mover advantage), or whether to be the first to set up your shingle and beat the competition, enduring long gestation periods.” Off the record, fund managers candidly admit that a 2% market share in Mumbai could get you more money than say a 35% share in Bhatinda.
There is also the risk angle to deal with. Rajiv Shastri, CEO, Sahara MF, says: “MFs are a complex product with a fair amount of risk. If we can make the products simpler, and have the complexity managed by the AMC, it would make it much more appealing for the investor.” He says that a product with derivative exposure, with the AMC providing a capital guarantee after five years with a 50% upside, may find many takers.

Diversified equity MFs fail to match sensex’s march

Najaf Ishrati MUMBAI

April 10, 2006,
ET Front Page

FIRST, the good news. In absolute terms, open-ended diversified equity mutual funds have delivered returns that are more than twice the 15% figure bandied about frequently.
The bad news is that as an asset class more than half of them have underperformed the BSE sensex. Simply put, a larger number of investors would have been better off had they blindly put their money into the 30-sensex stocks basket rather than going through the tedium of research before investing through mutual fund schemes.
Most funds choose to measure themselves against a benchmark index and some will quickly tell you that, although they have performed worse than the sensex, they have beaten their preferred yardsticks.
Let us first take a look at how the indices have performed. The top-performing cross-sector index was the sensex, which yielded returns of over 78.9% over the past year. Next come the BSE midcap and smallcap indices at 78.8% and 76.7%. The S&P CNX Nifty racked up a growth of 70%. Of the 112 openended diversified equity funds that ET looked at, 54 generated returns above 78.9% (sensex), while 58 underperformed it. Around 33 funds delivered returns that were lower than what the Nifty generated.

SBI Magnum series a hit


FINALLY, the stinger: Whatever time you consider— a week, a month, 3 months, 6 months or a year — diversified funds have, on an average, emerged among the top three schemes. This just goes to show that among the dozen or so equity-oriented schemes, chances of underperformance would have been far greater. In any case, 52% of the diversified mutual funds have been unable to match the sensex.
If diversified schemes have finished among the top five, three have come from the SBI house. The Magnum series has done well, with the Magnum Multiplier Plus generating the best return of 120%, thanks to the weightages in its portfolio given to engineering, automobiles and construction. Prudential ICICI, and Sundaram took the other places in the top five. It may be interesting to note that the worst diversified equity performer had a one-year return of 42%.
While the rankings based on performances may keep changing, investors need to allocate more time and energy in selecting their funds. This is because, going forward, relative returns may become a luxury, and even absolute returns could start turning negative.

Reward points: FIIs pay brokers ‘soft dollar’ for fringe services

Najaf Ishrati

April 24, 2006,
ET Front Page, Mumbai

THE concept of ‘soft dollar’ payments has been around in the US securities market for quite sometime now, and has recently made its way into India.
The term ‘soft dollar’, in the Indian context, is described as payments made by foreign institutional investors (FIIs) to Indian brokers, which are outside the ambit of normal brokerage charges. According to some Indian brokers, whom ET spoke to, this ‘soft dollar’ share can, at times, be as large as 5-10% of their total income.
These payments are for various services rendered by Indian brokers to their FII clients. These payments are legitimate, but are of a discretionary nature. They are over and above normal commission charges.
There is a rise in number of Indian brokerages which ramped up their research capabilities, and even those who were earlier providing a pure transacting platform now have begun to generate research based ‘buy and sell’ reports. Basically, it is for these reports, which FIIs receive, that brokers are paid ‘soft dollar’.
Further, these brokers service their FII clients by setting up meetings with the management of any company that the FII client wants to invest in. Also, some Indian brokers send their analysts abroad to their clients’ offices in Singapore, New York or London ( in most cases) for discussions and advice.
Finally, hotel and travel arrangements are made by brokerages for their clients. Obviously, all this comes at a cost, but there is no official ‘fee’ that is charged for these services, including the reports. FIIs, which use these services, have their own limitations in terms of the business that they can provide.

SEC concerned over ‘soft dollar’ transactions


INDIAN brokers are receiving ‘soft dollar’ payments for the services rendered to their FII clients.
Internal compliance regulations as regards the balance sheet size of their broker-dealers limit the number of brokers that they can make transaction through. Secondly, major funds invest across the globe and prefer to maintain an on going relationships with their broker-dealers across continents. Thirdly, although there is a restriction on domestic mutual funds that they should not give more than 5% of their business to a single brokerage house, there is no such requirement on FIIs.
The net result is that nearly 80% of the business by foreign funds in India would go to Tier I brokerages, (local arms of foreign brokerages like CLSA or Deutsche). Up to 20% of the business would go to Tier II brokerages, which are major domestic firms. In India, they would be the likes of Enam, Motiwal Oswal, ICICI Securities. And around 5% would be invested through small Tier III brokerages. Some of the FIIs, which utilise inputs offered by Tier II and III Indian brokerage houses, do not end up giving them a huge volume of business. It is in these cases that a few FIIs choose to pay ‘soft dollar’ instead.
Sources say that the US SEC is looking to curb soft dollar transactions, as the regulator sees it as a grey area, which may be used to push up prices of equities. The Indian brokerage industry is following developments in this area, but is not unduly worried, as they say that it is the ‘hard dollar’ that they are looking at, and any `soft dollar’ received is considered more as a bonus rather than as revenue.

NSDL to run a check on Indiabulls clients

Sebi Tells Depository To Verify If 559 Suspect Clients Are Genuine; Scam Final Order Expected By May 10


Bodhisatva Ganguli and Najaf Ishrati
MUMBAI
May 01, 2006

THE Securities and Exchange Board of India (Sebi) has asked NSDL to start examining the demat accounts of 559 clients of stock broker Indiabulls from Monday. This exercise will continue, at least, till Wednesday. If the NSDL scrutiny results in Indiabulls getting a clean chit, Sebi may pass a final order in the week beginning May 8, possibly around May 10, according to industry sources familiar with the matter.
The examination by NSDL is intended to verify whether the 559 clients mentioned by Sebi, in its interim order, are genuine or fictitious entities created to ‘corner’ shares during the IPO process. Thus, NSDL will check details such as permanent account number (PAN) details and proof of residence. NSDL may even call investors or visit their homes to verify that they exist.
The final order on Indiabulls may come before the final order on Karvy and the other alleged operators and financiers named by Sebi in its April 27 interim order, according to industry sources.
On Friday afternoon, Sebi had kept part of its interim order, relating to Indiabulls in abeyance, after a personal representation from Indiabulls chairman Sammer Gehlaut.
In its interim order, now kept in abeyance, Sebi had alleged that Indiabulls received 13,939 TCS IPO shares from 559 different accounts. It, thus, implied that these investors had applied for the TCS IPO on behalf of Indiabulls and that these shares have been transferred to its account just after the TCS IP0. In doing so, TCS had acted as a “key operator”, according to the Sebi order.
In its defence, Indiabulls said that the 559 account holders, who transferred shares to it, had done so in the Client Margin Account of the company. It said that this was towards meeting their margin requirements for trading, as per existing rules. According to the rules, clients must either hold cash or shares with their brokers, before they can trade on their platform.
Further, following the sale of TCS shares by these clients, the company clarified that the proceeds of the sales were forwarded back to them.
Indiabulls also said that the client accounts had been `in existence for years’ and were not fictitious or benami accounts, and neither were they opened for the sole purpose of making IPO applications.
The Sebi order had also claimed that one Ajay Kumar Gupta was a “financier” of Indiabulls. However, the fact that Mr Gupta had made a profit of Rs 2,345 after selling 17 shares cast some doubt on these assertions on the part of Sebi. Indiabulls, for its part, claims that Mr Gupta is a regular client trading through Indiabulls since September ‘03.
On the basis of the arguments by Indiabulls, Sebi had issued another order on April 28, holding its earlier ruling in abeyance’, u ntil its claims could be verified. This verification will hold the key to the final order, is likely by mid-May.
Sebi’s change of mind on Indiabulls was preceded by high drama on Friday morning, as reported by ET in its April 29 edition. Top Indiabulls officials, after working through the night, are believed to have gone to the residence of senior Sebi official R Ravichandran to explain themselves. Mr Ravichandran, who had spearheaded the probe, is the chief lieutenant of Sebi whole-time member G Anantharaman, the author of Thursday’s interim order. Talks among senior Sebi and finance ministry officials, which involved a flurry of SMS and cellphone conversations, is believed to have resulted in a clarification issued before market hours, which said that the ban on brokerages related only to proprietary trading.
Later on Friday morning, Mr Gehlaut appeared before Mr Anantharaman to explain his case.

MFs lay out chic options for high-end clients

Najaf Ishrati MUMBAI

Apr 12, 2006

AFTER resorting to repackaging the existing schemes as new products, the domestic MF industry is entering into a phase where it is looking to offer completely new and innovative products for the sophisticated investor. Industry watchers say that there are many products waiting in the wings, held back either by the lack of demand or by regulatory hurdles. “That the industry has been able to launch advanced products like exchange traded funds and fund of funds reflects on the level of innovation and ability to cater to specific investment needs,” says Sukumar Rajah, CIO, Franklin Templeton Investments. “However, we might see demand developing for sophisticated investment products such as absolute return funds, tactical asset allocation across various asset classes and currencies amongst the institutional segment,” he adds.
A few products waiting in the wings include UTI MF’s Retirement Benefit Unit Plan (RBUP). This pension plan will tie up with organisations to collect small amounts from employees and invest into the fund. “The speciality of such an offer is that employees in the non tax-paying, lower income brackets will have a product with an exposure to equity with the potential to give better returns than EPFO or PPF,” says UK Sinha, CMD, UTI AMC.
Industry observers say that there could be more development in the multi-manager format. Optimix, an arm of ING, is looking to launch the ‘manage the manager fund’. This fund would either give the money or the mandate, to managers from other funds with a speciality in their sector.
Sumeet Vaid, CMO, Optimix adds that another product which the industry could see, is the ‘capital guarantee’ product, in which a fixed percentage of the funds invested will carry some sort of insurance or underwriting. Obviously, a part of the allocation will go towards the payment of insurance premium. Another category of MFs neglected by the industry are geographic funds. Sources say that if demand rises, we could have a mandate to invest in companies from a particular state or region.
Sources say that what is missing from the picture is a benchmark fund which will try to capture the gains of the upside, while protecting the initial Rs 10. Regulations permitting, a fund which could invest in say, a 2-year sensex call option, could find ample demand, as part of the allocation will go to the derivative premium and the remaining into debt. The benefit of any rise in the index will be available to the investor.
Another scheme missing from scene is the ‘dynamic asset class’, with which the fund will invest in gold, commodities and real estate, apart from equity. Fund managers say that if they are allowed to reinvest in, say an HDFC real estate fund, they could offer their investors the chance to gain from an appreciation in land prices, which they can’t obtain directly due to high entry requirements.
Two types of funds launched recently which could see a spurt in demand are special situations funds and funds investing in foreign equity. Launched by Fidelity and Franklin Templeton respectively, these will be closely watched by the industry. Fidelity says that special situations arise out of the ordinary situations that companies find themselves in from time to time. These situations present an investment opportunity to those who can foresee and interpret the implications of that opportunity early enough. As obvious, research requirements will be high for such funds, and not all AMC’s will have the capacity to launch it.
Fund managers are looking to regulators like Sebi, RBI and the government to clear their roadblocks.

Are You Covered?

Your health may just be the most precious thing you have. Take your medical insurance seriously, says Najaf Ishrati

Jan 30, 2006,
ET Personal Finance, Mumbai.

INSURANCE companies are currently facing the classic chicken and egg syndrome, and more so when it comes to health insurance or mediclaim. A high claims-to-premium ratio, as seen with major PSU insurance providers, makes spending on advertising an unaffordable luxury. However, since insurance has always been a product that has to be sold in India, and not bought, high spending on advertising is needed to increase revenues.
Unlike other countries, India cannot afford to make health insurance mandatory as there is a cramp on infrastructure, with only about 0.7m beds available with the healthcare industry, according to estimates.
Current premium charges are roughly around 1% of the sum assured. This means with the premiums received from a hundred policy holders, the company can clear the entire claim of just one. This is an astounding statistic if you compare the cost of medical insurance in the West, which is much higher. Second, roughly 6% of all policy holders make claims every year, making it difficult for insurance firms to continue at the prevailing low rates. The claim-premium ratio in some firms is 110%, whereas it goes up to 127% in others.
The fact that it is statistically advantageous to get insured even though the insurance firm may be bleeding, the following percentage comes across very strongly. Of the total Indian population, less than 2% have health cover of any amount.
Dr Sandeep Dadia, with TTK Health Services, a leading TPA, says that the time to get yourself covered is now, as these cheap premiums are bound to rise given the cost of medical inflation, which is estimated at around 15% every year. A mediclaim policy is available to persons between 3 months and 75 years of age. For children under three, the policy has to be tied with one held by their parent. In many cases family packages are available which offer attractive discounts.
Mediclaim covers reimbursement of hospitalisation expenses for illnesses, diseases or injuries sustained to the extent that the policy was taken out for. It includes costs incurred for nursing charges, doctors fees and other hospital costs.
All policies have certain exclusions, where the insurance firm refuses to reimburse certain medical conditions. The significant ones are the illnesses which existed prior to the signing of the policy, alcohol and drug abuserelated problems, AIDS, pregnancy and child birth and dental treatment. This list varies from policy to policy.
Also, the policy amount or the sum that you can assure yourself for currently varies from Rs 15,000 to Rs 5 lakh, though efforts to raise the minimum sum assured are already underway. But the big question is, how much do you insure yourself for?
Industry players say that ideally the sum assured should be a function of your age and your capacity to pay. They say if you can afford, go for the upper limit. If you cannot, then there are several ballpark figures to ensure that you are not under-insured. For a child under 25, the most common purposes for which claims are made are medical conditions arising out of colds, fevers, and fractures, for which Rs 75,000 is proposed. This figure would vary from hospital to hospital.
The age group of 25- 35 commonly reports to the hospitals for infectious diseases and injuries, and a minimum sum assured of Rs 2 lakh would cover most expenses. From 35 onwards, things start getting dicey with heart problems and diabetes creeping in. A minimum sum assured of Rs 3 lakh is advised.
Currently, people under the age of 45 can get insured without having to undergo a test, although there is a move to bring this age down to 35. After 45, industry sources say that one should avail the maximum of Rs 5 lakh, and even take multiple policies to cover oneself if there is a family history of genetically passed illnesses. The 45-plus age group have commonly been treated for hypertension, diabetes, kidney stones, knee transplants and cancer. The range for the annual premium is vast and varied. It starts from a minimum of Rs 213 per year for a person less than 35 years of age with a sum assured of Rs 15,000. This could go up to Rs 17,156 per year for someone over 76 years who is renewing an existing policy for Rs 5 lakh. It may sound expensive, but it should always be looked at as a cost in proportion to the total sum assured. This cost ranges from just under 1% in some cases to around 2.5% in cases of elders. Industry people put it this way. If you think spending 1% of the sum assured on health is expensive today, what will you say if you have to shell out the entire 100%, without an advance notice?

What’s In It For You?

Insurance policies are not much about insurance anymore. Aspects like tax savings and investment have crept in and expectations run high. Know exactly what to watch out for, says Najaf Ishrati

Published Jan 10,2006,
ET Personal Finance page, Mumbai.


EVERY one knows insurance policies are being marketed more as an instrument of investment and tax saving, than for the sake of insurance per se. Go to any agent and before he starts to tell you about the nitty gritty of the policy, he will first discuss the tax
implications.
Then, he would proceed to tell you what returns you would get, over time, with your policy. Finally, he may mention a word or two on the insurance aspects, but only as ‘good to know’ information. So, if people are really taking these policies as investment vehicles, then an important issue they must address is the return generated by the insurer.
Insurance companies collect regular premiums and invest them in a common pool of funds. Every year, they use these contributions and the returns generated on them to set off claims arising from death and maturity benefit liabilities. Most companies share a part of the difference between these two cash flows, which is the profit of the company, with their contributors.
This sharing of the profit is done by means of accruing some extra returns of “bonus” to participating policies (policies where payment of bonus option was chosen), at the end of each financial year. If the person whose life was insured were to die during the term, his nominee would get the sum assured plus bonuses accrued till the date of death. If he were to complete the term, the policyholder himself would receive the maturity benefit with all the accrued bonuses. These bonuses can be paid yearly (reversionary), on termination of policy (final), or interim. It must be noted here that for unit-linked insurance policies, ULIPs there is no concept of a bonus.
Investors look forward with great expectation towards the
bonus declared by insurance companies on their various policies. However, actual bonuses declared have not been sending policyholders laughing anywhere, least of all to the bank.
The point is that, with insurance companies having to compulsorily wed a bulk of their disposable funds to gilts, the profits earned by them cannot be in the margin of 15% or 20%. Thus, as expected, even rallying bulls in financial markets see mediocre bonuses being given out.
This year, the market leader, LIC (Life Insurance Corporation of India) has declared bonus on its various policies in the range of 3.1% – 5% on the sum assured. For policies maturing in its fiftieth year, that is, September 1, ‘05 to August 31, ‘06, it plans to pay an additional bonus.
Max New York Life has a proportionate basis for doling out bonuses. Say, if your policy matures after 30 years, then every year, it will give you bonuses at a lesser rate, than if the term of your policy were 10 years. With a shorter policy, you would get higher rates of bonus so that effectively, both such policyholders in the company stand to benefit equally. Then, there are companies which have a coupon rate of bonuses that are guaranteed throughout the life of the policy, irrespective of portfolio ups and downs. ICICI Pru pays a flat 3.5% of your sum assured as bonus. It has maintained this rate for quite a while now. Kotak has paid 6.75% on premium paid, net of all policy charges this year.
Similarly, SBI too, has a rate of 4% on net contribution, but some SBI Life policies have been given extra remuneration, up to a further 4%. Aviva has no fixed rate and declares bonuses every year. This year saw policyholders getting between 4.25 to 4.5% reversionary, with a final bonus of 14%.
When it comes to selecting the insurer, people must look at how the company is allocating its portfolio. Secondly, since the base, the sum assured, net contribution or others- on which your return was percentaged- will make a huge difference to your pocket, it makes sense to be aware of it before signing the contract.

Nothing Sentimental About This

Insurance policies for children are another variation of money-back policies. So, how do you go about zeroing in on a policy that would suit your and your child’s requirements, without getting too emotional in the process? Najaf Ishrati shows the way

Published December 21, 2006,
ET Personal Finance, Mumbai.


MONEY back insurance is another tool for providing protection along with the saving or investment function. Once the policy has been made out, the insured continues paying a periodical premium to the insurer and gets a specified life cover in return. The insurer also pledges to return the premiums, along with bonuses or investment returns that may accrue, to the policyholder on prespecified dates or periods before or after the maturity of the policy scheme. Thus, the insured gets risk cover in case of death, and a regular source of funds upon survival.
A variation of the money back policy is the children’s policy, the difference being that the policy would mature not on the retirement of the parent, but on the coming of age of the child. The policyholder can decide when he wants his monies back, and could tie it to the educational, entrepreneurial, marriage needs etc., of the child. Death of the parent during the tenure would entitle the child to the sum assured, and in a few cases, also to the maturity benefits.
It is within the children’s plans that some variations can be seen. While most companies insure the life of either of the parents, three companies insure the child’s life. Although insuring the non-earning member and making the bread-winner the beneficiary defies logic, it makes no difference to the future of the child. If the child lives, he/she is assured of the maturity value, if not, then, the question of education or marriage does not arise. Such schemes have waiver of premium riders inbuilt into them, and if the parents get incapacitated, the scheme is treated as being paid as normal until the maturity benefits accrue.
So, if it makes no difference, why are such schemes on offer? There is, however, one major beneficiary under this type of policy, namely the insurance company. For roughly the same amount of premium, it has cut its risk of the death of an adult, to that of the death of a minor. Or, in other words, it is charging the premium rate of an adult, on the life of a child.
Insurance policies for children have a lot in common. In fact, when it comes to premium, there is very little to differentiate between schemes. The premium for a father aged 35, for a term of 20 years on a sum assured of Rs 5 lakh ranges between Rs 22,820 to Rs 33,410. Most of the premiums hover around the Rs 27,500-mark. The difference between the premiums could indicate the little bit extra that the scheme offers. For instance, HDFC Standard Life has three schemes, maturity benefit, accelerated benefit and double benefit plans. Most companies offer this by one name or the other, whereby on the death of the insured in the first case, the remaining premiums are waived and cover is provided on maturity.
In the second case, maturity is payable immediately upon death and the policy would lapse. In the double-benefit case, the sum assured would be paid immediately upon the death of the insured, premiums would be waived off and maturity benefits originally promised would also accrue when the time comes.
Sums can be assured from a minimum of Rs 25,000 to a maximum based on the insured’s underwriting. The minimum entry age for parents is 18 years while the maximum is 60. There is quite a range available in terms of the tenure of the policy. The least required period is five years for of AMP Sanmar while Max NY offers the maximum term of 26 years. The minimum annual premiums required start at Rs 1,800 with HDFC Standard Life for inuring a parent and Rs 1,500 for covering a child.
You should also look out for special deals. For instance, the Max NY Stepping Stones plan offers an extra guaranteed 30% of the sum assured on the last maturity payment. Met Life offers guaranteed additions of Rs 50 on every Rs 1,000 and then a certain percentage on these guaranteed additions.
Of the companies that cover the lives of children, the inbuilt premium waiver rider for the parent comes bundled with the policy, except in the case of Tata AIG, where it has to be purchased separately.
It may appear that children’s plans may not have much between them, but investment, if need be, must made in them after careful consideration and not goaded into it by either by the agent, or the sentimentality of the issue.

Enjoy The Ride

Your insurance policy may come with options for additional covers, which could make a big difference. Don’t let the incremental cost put you off, says Najaf Ishrati

Nov 29, 2005,
ET Personal Finance, Mumbai

EVER put together a jigsaw puzzle with painstaking care, only to realise that the last piece was missing? Insurance products available today are designed to suit almost all insurance or investment needs, but there could still be that one crucial piece missing.
In insurance terminology, that piece would be called the ‘rider’. Riders are economical purchasable add-ons to the basic policy, which customise it to a high degree. Suppose you’ve taken a life policy, but due to some unfortunate incident are incapacitated from earning. This earning loss could easily nullify a thus-far paid-up policy, if the premium payments aren’t made on time. Wouldn’t it be nicer if your policy provided for such an eventuality, exempted all premium-paying requirements and yet promised death or maturity benefits? Or say a rider, which would pay a specified sum to the insured, if he were terminally ill with less than six months to live?
Although initially, riders can seem like an added and unnecessary expense, they must be given some thought nevertheless. Its just that the saying, “who knows what can happen?” sounds a whole lot better than “who knew that this would happen?”
Quite a few riders are available in the market. The accidental death rider assures an extra amount payable, over and above the base amount, in case of death in this manner. Under a permanent disability rider, premium for the basic plan may be waived to the extent of the rider sum assured. With an income benefit rider, the death of the life assured during the policy would assure an annual percentage of the rider sum to the beneficiary, on each policy anniversary till the maturity of the rider.
The waiver of premium rider is another name for the permanent disability rider, although here, all future premiums are waived. Another useful rider is always the one for critical illnesses, where protection is provided against 8-12 critical illnesses, such as major organ transplants, renal failure, stroke, paralysis, heart attack, valve replacement surgery, cancer, etc. Benefits are paid on contracting the said illness, up to the amount specified.
Then there is something called the guaranteed insurability rider, where ironically, it insures your insurability. It guarantees the buyer the right to purchase additional insurance at different stages in his life, without any further medical examination. If incremental responsibilities are expected ahead, this one might be a good option. A simple option is the term rider, which allows you to manage your changing needs and buy additional life insurance for a limited period. The dread disease rider improves your financial position as and when medical expenses rise in the event of specified diseases.
So, whether you’re planning on riding it alone or not, it always makes sense to critically examine these insurance companions before brushing them aside due to slightly incremental costs.

Covered For Life?

Whole life insurance policies may not give you much benefits while you’re alive, but there are several kinds on offer. Sift through them,and you could find the perfect one for you. But you’ve got to understand the nuances in order to choose the right one, says Najaf Ishrati

Sep 13, 2005,
ET Personal Finance

INSURANCE products come in various shapes and sizes. One common category is the whole life scheme, which grants protection for the entire duration of life. Traditionally, participating in this scheme meant paying regular annual premiums until death, after which the sum assured would be paid out.
The policyholder would not receive any benefit as there is no payment on `maturity’ or survival’. I n a c apsule, t he whole life product was a very basic policy, easy to swallow, granting extended cover at reasonable rates of premium throughout life. If only the insurance companies also believed in keeping things simple, investors would not be sweating it out with their calculators right now.
The mutations and combinations of the whole life policy that exist in the market today make it difficult for consumers to compare and decide on which one suits them. Some come with profits, some without, most have a maturity age; some with incalculable GSVs, or what the company’s call guaranteed surrender values; and yet others are either unit or equity-linked. Options to take up limited payment schemes are also on offer. However, for the smart and the alert, this chaos presents a fine opportunity to select the scheme that is tailor-made for them.
Whole life policies offer more variety than term policies, when it comes to the age of the insured. Even a newborn is eligible for this policy, with three companies offering insurance to toddlers. Entry ages for others range between 12 and 20 years. The maximum entry age sees a range of between 50 and 70 years across companies. About half the companies that offer this product, maintain an entry cut-off age of 60.
When one looks at whole life policies, one assumes risk cover until death, whenever it may be. However, there are only four companies today that provide this cover. The others either do not provide this extended cover at all, or have in place a compulsory maturity option, at ages ranging from 80 to 85.
Of these, it is possible to find a company or two, which would stop providing risk cover after the age of 70 and would just return the policy fund after that. All this changes the nature of the whole life policy to a “cum endowment” policy, including the element of savings, to that of pure risk. However, the amount of savings that is guaranteed is something policyholders must look out for, as the rate offered may be lesser than a banks savings account.
A policyholder may choose the premium paying term here, where he could either sign up for a single premium whole life, (HDFC, Birla), pay premium for a limited term and yet enjoy lifelong protection (Sanmar, Birla, Metlife) or continue paying premiums until death, (Max NY, Birla)
The point at which these schemes start to differ is when it comes to calculating their premiums, with other variables remaining constant. An example of a healthy 35-yearold male is taken, with a sum assured of Rs 5 lakh and a premium paying term of 20 years, wherever applicable.
Otherwise, the maximum term was used to calculate the premiums. The difference in the premium amount between various policies is mind blowing, and could give rise to a lot of confusion. Exploring what exactly they make your money do, can solve the mystery behind these differences.
While the average premium for a 20-year term was Rs 21,905, the minimum recorded was Rs 8,205 (MetLife) and a maximum of Rs 47,364 (Birla). There is a reason for this vast difference. In the case of MetLife, the sum assured of Rs 5 lakh was the maximum possible death or maturity benefit, which was guaranteed.
Now, in the case of the Birla fund, the largest guaranteed death benefit is of Rs 20,07,996 at age 75. Of course, by then, the investor would have paid Rs 18,94,560, but that is another matter. The non-guaranteed portion is left to the imagination, with the company investing its proceeds in the market.
However, taking the example further, Rs 9,03,51,899 would be the death benefit at age 99, if the fund grew at an annual rate of 10%. It’s now up to the investor, as to whether he sees Rs 20 lakh or Rs 9 crore.
This is the reason insurance companies have a problem comparing schemes on the basis of the sum assured, and would much rather use the assumed maturity value instead. It is the investor who has to ask the question: what if the fund ends up with a 10% negative return in year 3 and then another 6% in year 7? What happens then, to his maturity value?
In the premiums to end of term, or till death category, three companies prominently display their wares. LIC, with a maximum premium paying term of 40 years or till age 80, whichever is earlier, has a premium of Rs 14,083 for the 35-year-old male. Max New York Life accepts premiums till death and offers the sum assured only on death or surrender value benefits on quitting, maintaining the cheapest annual premium rate of Rs 5,985.
Aviva has a twist in its scheme. At any time, during the tenure, you could stop paying your premiums and convert your scheme into a fully paid up one, and the cover would remain at the cost of the units held in balance. This balance would be periodically reduced, and on attaining zero value, the policy would lapse. Choose carefully.

Choosing the right term insurance policy

How Do You Know Which Policy Is Best For You? Najaf Ishrati Gives You The Lowdown On The Term Policies Available In The Market

September 7, 2005,
ET Personal Finance

THE concept of life insurance and its coverage through various policies has been around for some time now. With 14 registered companies offering a multitude of schemes and policies, singling out a policy can be quite an uphill task.
Insurance products geared towards granting various amounts of financial relief on the loss of a human life, are variations of four basic types of insurance requirements — pure risk, savings, investment, and retirement. Typically, a pure risk cover promises to pay a predetermined sum to the beneficiary, in case the person insured dies within the time period that the policy was taken out for.
On survival of the insured through the term, the insurance company would not pay anything. Premiums, payable at intervals decided by the policyholder, come at the lowest rates for these types of schemes. In the other varieties, the insurer guarantees some payment even on survival.
ET zooms in on the pure risk or ‘term’ policies. These are available to people who have attained a certain minimum age, mostly 18. The age up to which term insurance can be availed, or the maximum entry age, is generally between 50-60 years, depending on the insurer. Six companies offer protection even to those aged 60.
In addition, companies maintain minimum and maximum term periods, over which policies can be underwritten. It is seen that companies mostly prefer a minimum term of five years, with two companies — ING Vysya and Kotak Mahindra OM — reserving a minimum
cover period of 10 years. On the maximum duration front, term periods of 25, 30, 40 and 42 (up to age 60 plans) are seen.
The insurance business is nothing without variables. These days, a policyholder can insure himself with amounts (sum assured) large enough to send his family to the moon and back, provided he can pay the premiums. Normal sums assured, however, are decided depending on the financial requirements or obligations of family or oneself. It is in this area, that most companies differ. While seven companies offer a ‘no upper limit’ policy, others provide a ceiling, the lowest being the Rs 10 lakh offered by Bajaj Allianz.
All the policies converge is in the area of the minimum sum assured, or the minimum face value that the company is willing to underwrite a policy for. Companies have minimum premium receivable guidelines also, below which policies are not undertaken. While the minimum sum assured range from Rs 25,000 (HDFC Std Life) to Rs 500,000 (LIC, Aviva), the minimum annual premiums are pegged from Rs 1,000 (Sanmar) to Rs 2,500 (Vysya).
What makes these schemes all so attractive, are the rate of premiums. A healthy 35-year-old male, insured for an amount of Rs 500,000 for a term of 20 years, would pay annual premiums in the range of Rs 1,865 (HDFC Std life) to Rs 3,747 (Allianz Bajaj), depending on the company he partners with, although the mean for this classification stands at Rs 2,524 per year. ICICI’s minimum premium requirement of Rs 2,400 excludes it from this comparison, as the rate at which it calculates its premiums pegs the amount at below this level.
A few companies have plans with reduced premium rates, but require a minimum sum assured of a significantly higher amount. For instance, using the above illustration, while altering only the sum assured to Rs 10 lakh, Kotak’s Preferred Term Plan requires a yearly contribution of only Rs 3,400. These low premiums start to look far more attractive when compared with premiums of policies where you get your money back — which would be around 24,000 per year for the same conditions.
Then there are riders on these policies. Most policies come with add-on benefits for a small increase in the premium price. These could be accidental death or disability covers, premium waivers in case of earning incapacity, or plain-vanilla hospitalisation expenses.
For instance, Vysya’s ‘Conquering Life’ comes with an inbuilt critical illness plan, which covers expenses incurred on 10 pre-specified illnesses, apart from the regular life insurance, thereby explaining its higher premium price.
Term policies work for those who feel the need to insure themselves up to a certain age, but don’t want too much bother with high premiums. Most policies promise to have that little bit extra on offer, which the potential policyholder must scrutinise before approval.

Mutual funds in a tizzy on realty investment norms

Najaf Ishrati

June 17, 2006
ET Mumbai

WITH guidelines for investment in real estate by mutual funds (MFs) expected in a week, there is a considerable speculation as to what exactly these guidelines may contain. MF players say that investing in real estate is a different ball game altogether, with a few similarities to investment in equity.
The major difference that there is no exchange’ where real estate can be traded is obvious enough. However, the absence of an exchange throws up many issues. Speaking recently in Mumbai, Milind Barve, managing director, HDFC Mutual Fund, explained, “Without an exchange, suppliers are not regulated. There is no regulator who looks at the buyers interest. Also, what will be the time taken for settlement? Will it be T+2, or T+12 months?”. According to him, without the exchange, the issues of price discovery, settlement and liquidity become paramount. Real estate being an illiquid asset, the funds may have to be close-ended in nature.
The next issue is that with real estate, there are no `securities’. It becomes a physical asset, it can’t be safely left at the hands of a custodian. The pertinent question in this case is, ‘who is the custodian?’. Further, as against taking shares in the demat form, here the MF will have to take delivery of the title deed and other documents. This leads to a further issue, which is how good is the ‘quality of title?’.
With MF investment going into real estate, even valuation poses a new problem. With equity funds, AMCs have to supply NAVs of each of their schemes by 8pm everyday. Such valuations will not be possible with realty investments. Analysts say that there are some overseas funds, which publish their valuations just once in a year. In this case, it is learnt that AMFI has suggested a valuation of once every three months. But even this quarterly valuation will pose challenges. Here, there are no shares whose numbers have to be multiplied by their closing price to derive the NAV. Mr Barve, also the chairman on AMFI’s committee on valuation, has suggested that funds be allowed to have a panel of pre-approved valuers, who will do the valuation for them, and that disclosures are made on the method that has been chosen for the valuation.
The last issue that Mr Barve highlighted was that of risk management.
The risk of loss through concentration in one area had to be mitigated by diversification. He suggested diversification on three parameters, namely by location, project and developer or supplier. Further issues that crop up here are those of related party transactions.

Investors get savvy, shun blind faith in IPOs

Najaf Ishrati

May 29, 2006,
ET Markets, Mumbai

WARY investors are unwilling to be beguiled by fancy projections and tall statements of companies making IPOs and are instead indicating their circumspection by submitting bids at the lower end of the price band.
An analysis of the just-concluded four IPOs shows that the dramatic change in investor sentiments in the last few weeks has revealed itself in the defensive and conservative response to the offerings. Book managers were finding it difficult to get full subscription and most of the bids were coming in at the lower end of the band.
The situation has changed dramatically from the time when investors were hungry for new issues, almost all of which ended up getting subscribed a number of times over. Further, before the crash happened, most of the bids were coming in at the top end of the price band. On May 18, when the markets tanked 826 points, two companies, Deccan Aviation and Gangotri Textiles opened for subscription. Two more companies, Unity Infraprojects and Rathi Udyog, accessed the capital markets on May 19, the day the markets fell another 452 points.
The worst affected was Deccan Aviation, which saw a demand for only 0.76 times of the total issue at the top end, and 1.22 times the lower end. Gangotri Textiles, which drew a demand of 0.85 times at the top end, and just about filled its quota at the lower end. Rathi Udyog with demand for 92% at the top end, and 127% at the bottom. In comparison, Unity Infraprojects did relatively well drawing bids 2.05 times the number of shares offered at the top end of the price range and 2.36 times the lower.
Patel Engineering, which was the last issue to close (May 9) before the crash, saw 2,641% or 26.4 times shares offered at the top end. DS Kulkarni’s follow on offer (May3) attracted bids 33.7 times the shares offered at the top end. The jinx might be drawing to a close as Prime Focus, which currently has its IPO open, hardly sees any difference in the demand for shares between the two ends of the price bands.

Bumpy road ahead for D Street as institutions plan to exit on rally

Najaf Ishrati

June 05, 2006
ET Economy, Mumbai

ALTHOUGH Friday’s rally, helped by some heavy covering of short positions after consistent FII outflows, may liven up hopes for investors, the outlook remains extremely cautious in the short term.
Analysts say the liquidity issue cannot be swept under the carpet. From a stage when the system was flush with liquidity from domestic and foreign funds, the correction has caused a flight of capital to safer grounds. The expectations of a possible 50bps rise in interest rate in the US have fuelled the outflow.
Many institutions have adjusted their strategy to a ‘sell-on-rally’ environment, expecting markets to weaken further. The main factors cited for the shift in outlook were increased global risk aversion and rising interest rates in India & abroad.
Jyotivardhan Jaipuria and other strategists at DSP Merrill Lynch chorus: “Given the large FII flows over the last three years, India may be vulnerable to a fall in global risk appetite.” Many of the top foreign funds are expecting the sensex levels of 9000 or below in the near future. DSP ML has a figure of 9000; UK-based Rathbones Investment Management expects markets to trade between the 9000 and 7700 levels, while Nomura sees a fair value at 7000.
In a recent India research report, Hong Kong-based Nomura International stated: “While the macro problems of running both a deteriorating current account deficit and a fiscal deficit have yet to be adequately addressed, private sector credit has become increasingly dependent on fund flows. With a negative basic balance of payments, the credit system appears much more susceptible to an external shock. We feel that investors are being betrayed by high earnings growth projections and macro risks are being ignored. We believe Indian equities have further ground to correct compared to regional peers, and thus remain bearish.”
Other players say it’s a good time to take a long-term stance. “If you thought that the markets looked attractive for the long term at 22 PE, there is no reason why you should not buy at PEs of 16-17,” reasons Pankaj Razdan, chief executive officer, Prudential ICICI AMC. The sensex currently has a PE of 18.5, a price to book ratio of 4.6, and a yield of 1.43. Mr Razdan says a weekly outlook will be very difficult to make, adding that he did not see a major downside from here on. “Small investors and high net worth individuals can look at deploying their money in dips over the next two three weeks, looking at a long term time frame of 3-5 years,” he predicts.
“Different people have many different views at this time. For instance, an AMC may have one view on the sensex levels, while strategists may have a completely different view. However, we maintain that the correction has been a healthy one. While the long-term outlook continues to be good, a lot needs to be done to justify the levels of optimism which were present before the correction,” says an official with a top foreign brokerage.